U.S. to block WorldCom-Sprint deal

Regulators cite concerns about competition

LizaRoberts

NEW YORK (CBS.MW) -- WorldCom and Sprint hung up on their planned merger Tuesday in the face of regulatory opposition.

The U.S. Justice Department said it would file suit to stop WorldCom’s $129 billion acquisition of Sprint, asserting that the mega-merger would harm competition and stifle innovation in the telecommunications industry.

Shortly thereafter, the companies decided to withdraw their merger proposal before the European Commission, where they also were facing rejection on competitivity grounds. That European Union body was slated to vote by July 12.

“If, in the future, the parties decide to proceed with the merger, they will make such notifications as are appropriate under European merger laws,” WorldCom and Sprint said in a joint statement.

Shares of WorldCom (WCOM) shot up 2 3/16 to 39 11/16. While it may seem counterintuitive, the stock is higher because the seeming termination of the deal removes a great deal of uncertainty that has been hanging over WorldCom since plans for the merger were unveiled last October.

In addition, some analysts suggest the failure of WorldCom to acquire a much-needed wireless business may cause the carrier to become an attractive acquisition target itself, especially for large foreign carriers seeking entry into the U.S. market. WorldCom is the world’s premier carrier of Internet traffic and is a leading supplier of service to multinational corporations.

Protecting competition

During a press conference, Justice antitrust chief Joel Klein noted that most Sprint customers view WorldCom as their next best alternative as a long-distance carrier, and vice versa. The two companies jockey intensively for subscribers and present the best competition to AT&T. By allowing them to combine, Klein said, competition would be significantly diminished.

“If this merger were to go through, consumers and businesses would pay the price,” Attorney General Janet Reno said. “Going from the Big Three telecom carriers -- Sprint, WorldCom and AT&T -- to the Big Two would be like giving customers the wrong number.”

In addition, Justice officials cited concerns about concentration in the so-called Internet backbone, the mass of fiber-optic cables over which Web information travels. WorldCom is by bar the largest operator of the Internet backbone, with as much as half the market, according to industry estimates. Sprint is also a large supplier.

Even though the companies offered to sell Sprint’s Internet backbone, regulators already think WorldCom has established too much dominance in that part of the market. They worry that innovation will be stifled if WorldCom enhances its position as the gatekeeper to the Web.

“This merger poses a competitive threat to the development of the Internet,” Klein said.

What companies say

In light of the Justice Department’s actions, the carriers said they will consider alternatives. “WorldCom will promptly review its options with Sprint,” said Michael Salsbury, the company’s general counsel.

While European regulators were prepared to block the deal based on concerns about concentration in the Internet backbone, U.S. regulators focused more heavily on the long-distance market. WorldCom is the No. 2 U.S. provider of long distance and Sprint is No. 3. Between those two companies and AT&T (T), they control about 80 percent of the consumer long-distance market.

Sprint reiterated Tuesday that it didn’t understand the Justice Department’s objections. The agency’s misplaced “historical focus,” Sprint said, failed to take into account the vast increase in competition in the long-distance sector over the past few years.

What next?

The Justice Department’s move to block the deal comes just one day after the E.U.’s top antitrust official, Mario Monti, told reporters during a visit to Washington that he planned to urge the full E.U. to reject the companies’ current merger proposal.

Aside from offering to sell Sprint’s Internet backbone business, the companies even considered the spin-off of part or all of Sprint’s long-distance business. Yet regulators apparently remained unswayed.

There are some indications the carriers could try to offer a revised proposal. A source close to the matter told CBS.MarketWatch.com there’s still a chance the companies could devise another solution.

Speculation persists that the companies may decide to carve Sprint up into pieces in the hopes that a much scaled-down deal might pass regulatory muster. That might not be in the best interest of Sprint shareholders, however.

The wireless PCS business is Sprint’s most valuable asset. Without it, the rest of the company is far less attractive to potential buyers, if not to Sprint shareholders themselves.

Such maneuvers, moreover, are not guaranteed a success. The companies may decide a deal is not worth the time and money.

If one thing is for certain, it’s that regulators are going to look askance at any more big mergers in communications industry, which has rapidly consolidated over the past few years.

“The pending DOJ and E.U. decision could also set precedent for (possibly inhibiting) further consolidation within the telecom sector,” noted Merrill Lynch analyst Adam Quinton in a report to clients.

Looking at options

As for the companies themselves, analysts expect Sprint to get bought out by someone. Speculation centers on foreign carriers such as Deutsche Telekom (DT), which are seeking access to the U.S. market, or perhaps even a Baby Bell. BellSouth (BLS), for one, mulled an offer for Sprint after WorldCom unveiled its buyout plan last October.

WorldCom, meanwhile, is expected to lay out a new strategy for acquiring a wireless business -- the reason it sought to buy Sprint in the first place. The company is the only major U.S. carrier without a wireless business.

Options could include reselling wireless service, entering upcoming U.S. airwave auctions and starting from scratch, or buying another established wireless operator such as Nextel Communications (NXTL) or VoiceStream Wireless (VSTR).

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